Corporate Governance 3 - Corporate Governance Code PDF

00:01 Welcome to part three of the Corporate Governance series of lectures under the topic Corporate and Commercial Practice. Today, we will cover Interested Person Transactions. We will delve into the Code of Corporate Governance and detail the comply or explain regime for the Code. 00:29 Let\'s...

00:01 Welcome to part three of the Corporate Governance series of lectures under the topic Corporate and Commercial Practice. Today, we will cover Interested Person Transactions. We will delve into the Code of Corporate Governance and detail the comply or explain regime for the Code. 00:29 Let\'s start with IPTs. Now, IPTs can actually influence an issuer, its subsidiaries, or associated companies to enter into transactions with interested persons that may adversely affect the interests of the issuer or its shareholders. To guard against this risk, Chapter 9 of the Listing Manual sets out certain rules regulating IPTs. 00:56 In applying these rules, rule 902 states that regard must be given to the objective of the chapter, the economic and commercial substance of the IPT instead of the legal form and technicality. 01:16 Generally, an IPT means a transaction between an entity at risk, which is the listed issuer, its subsidiaries, and associated companies over which it\'s controlled, and an interested person, which is defined as a director, CEO, or controlling shareholder or its associates. There are two terms here, controlling shareholder and associate, which we need to understand a little bit more. 01:47 This is the definition of associate, which covers the directors or CEOs or controlling shareholders immediate family members. That means the spouse, child, adopted child, stepchild, sibling and parent, or trustee who has immediate family members are beneficiaries, and any company in which he or his immediate family member has an interest of 30% or more. Then you have the definition of a controlling shareholder, which means someone who has 15% or more in the listed issuer. 02:16 or whoever exercises control over it. 02:22 The stock exchange has the discretion to deem any person or entity to be an interested person if that person or entity has entered into or intends to enter into a transaction with the entity at risk, and there\'s an agreement or arrangement with an interested person in connection with that transaction. This power, under listing rule 904, expands on the class of people that are treated as interested persons. Because the exchange now has the power, even though that person is not, strictly speaking, 02:52 already defined as an interested person, to deem that person to be an interested person. 03:01 The class of transactions covered by Chapter 9 and IPTs is a very broad one. 03:09 The categories of such a transaction are defined as an inclusive list, not a closed list, not an exclusive one. This list includes the provision of financial assistance, acquisitions or disposal of assets, the provision or receipt of goods or services, the issuance or subscription of securities, options, joint ventures, whether or not these transactions have entered into the ordinary 03:38 entered into directly or indirectly. 03:45 Rule 905 of the listing rules actually requires there to be an immediate announcement if the transaction concern has a value equal to or more than 3% of the listed group\'s latest Audited Net Tangible Assets or NTA. 04:03 Rule 906 states that the issuer must obtain shareholders\' approval for any IPT of a value equal to or more than 5% of the listed group\'s latest audited NTA. There is also the requirement to disclose the aggregate value of IPTs added into during the whole financial year under review in its annual report. That\'s found in Rule 907. But these rules don\'t apply to any transaction below \$100,000. 04:32 which is a de minimis rule. Of course, you can\'t circumvent this by artificially dividing up or breaking up your transactions into many under \$100,000 each. That\'s because under the listing rules, the stock exchange is empowered to aggregate transactions below \$100,000. So even though the materiality threshold is set at \$100,000, it\'s been shown that in practice, many companies try to evade the \$100,000. 05:01 dollar materiality threshold by entering into separate transactions at \$99,000 or \$90,000 each and have a whole series of them. Possock Exchange is able to aggregate these transactions that are entered into below that threshold and treat them as if they were one transaction so as to give effect to the objective of the IPT rules and drill down into the economic and commercial substance of the IPT rules and the transactions. 05:33 From a disclosure standpoint, listing rule 907 requires the issuer to disclose the aggregate value of the IPTs entered into with that interested person during the financial year by seeing what the nature of the relationship is between that particular interested person and the listed issuer. 05:52 you are required to disclose the aggregate value of all IPTs during that year, unless those transactions are either less than \$100,000 or have been covered under a general shareholders mandate obtained from shareholders. 06:09 Do take note of the exceptions in listing rules 915 and 916. 06:17 These are some of the exceptions in listing rule 915. For example, you do not need to make an announcement or to get shareholders\' approval or to have annual report disclosures for dividends, bonus issues, or preferred offers of shares on a pro-rata basis to shareholders, or grants of stock options, other employee share option schemes, or investments with investing companies where the interested person\'s interest is less than 5%. 06:51 or procuring goods or services on publicly quoted fixed or graduated scales. For example, it won\'t be an IPT if you buy electricity or water at fixed public prices from a company of which you are director or where you get telco services. Another exception would be the provision or receipt of financial services from licensed banks or financial institutions on normal commercial terms and in the ordinary cost of their business. 07:22 Directors remuneration and employment remuneration generally, except for Golden, Perishwood payments are also not deemed to be IPTs. 07:34 Rule 916 has a separate set of exceptions and you don\'t need to get shareholders approval for these transactions, but you still need to make an announcement and you still need to make any report disclosures, if for example you have leases or tenancies of real property or land of not more than 3 years with an interested person, or you have contracts awarded by public 08:01 We\'ll see here on screen some other important exceptions under rule 916 that you really should take note of, especially relating to co-investing in a joint venture together with the interested person subject to some exceptions. 08:20 I earlier mentioned a general shareholders mandate that can be obtained. What is this shareholders mandate? Well, Listing Rule 920 allows listed companies to obtain a general mandate from shareholders. Basically, it gives the listed company sort of a general approval to say if you have a particular type of transaction, and that is frequently obtained on a recurrent basis or it\'s of a revenue or trading nature, and it\'s necessary for its day-to-day operations, for example. 08:48 to purchase and supply of raw materials or inventory or stock necessary for its business. Then rather than having to get specific shareholders approval each time for each IPT, then you can actually obtain general approval upfront to say, look, although these transactions are going to be treated as IPTs, the general mandate, which of course will need to be put before shareholders and a circular prepared to explain what the approach would be. 09:17 will actually address the control measures that the listed issuer intends to put in place to ensure that shareholders\' interests are safeguarded and that the interest of the interested person is not preferred to prejudice that of the listed issuer. This general mandate is usually obtained at the annual general meeting and is usually subject to annual renewal. 09:42 Now we turn to the Code of Corporate Governance. The very first code was issued in 2001. Then it was revised in 2005. The third edition came out in 2012. And the current code is the 2018 code, which is its fourth iteration. The code\'s lineage comes from the first UK combined code in 1992, which resulted from the Cadbury report. 10:13 Most codes around the world are based on a comply or explain approach, a very flexible and less prescriptive approach to good corporate governance practices. Let\'s take a closer look at how comply or explain really works. 10:32 Comply or explain is actually a middle ground between mandatory prescriptive rules like the law or the listing rules on the one hand, and on the other, voluntary best practices like the practice guidance issued under the code. There are many advantages of this flexible comply or explain regime. 10:57 These are some of the examples of the benefits that you may have. 11:06 How is comply or explain actually effected and applied under rule 710? Well, 710 requires each listed issuer to describe in its annual report its corporate governance practices with specific reference to the provisions of the code and its principles. 11:28 Please note that the principles are separate from the provisions of the Code. Now, the principles of the Code are mandatory and you must comply with them. 11:41 If the listed issuer chooses not to comply with the provisions of the code, however, it must explain the reasons why it\'s chosen not to comply, what is the noncompliance, and it must detail in its explanations the alternative practices that have been adopted to satisfy the mandatory principles of the code. So you can choose to comply with some provisions and choose to deviate from others. 12:11 But where you deviate, you must justify and explain the reasons for your deviation and how you still satisfy the applicable principle. 12:22 This is a useful chart that sort of explains the differences between the principles and provisions of the code. There are 13 principles in the code, which are basically overarching and non-disputable statements embodying the fundamentals of good corporate governance. These are mandatory. You must comply with them, and you must explain how you comply with them. 12:46 Apart from these principles, you have 52 provisions which are more practical and actionable steps that guide companies in complying with the substance of the principles. The provisions are applied on a comply or explain basis under rule 710 and you must explain how you\'ve complied with them and if you don\'t comply you must justify the deviation and explain how your alternative practice still 13:16 At the bottom, you have practice guidance, which is a set of non-binding guidelines, which are completely voluntary, representing best practice for companies to aspire to. 13:29 The practice guidance is issued by the MES and overseen by the Corporate Governance Advisory Committee. 13:37 Now this brings us to the end of part three. In the next part, part four, we will look more closely at the content of the Code of Corporate Governance. And we will dive a little deeper into independent directors, the nine-year rule, board composition requirements, and the various board committees that listed companies are required to have. - Code of Corporate Governance - code of corporate Governance, it applies to listed companies only via the listing rules and SFA Announcement requirement and shareholders' approval requirement in respect of IPTs -- Chapter 9 - Interested Person Transactions - Objective - To safeguard transactions with interested persons to ensure that interests of Issuer and its shareholders are not adversely affected - Defintion of \"Associate\" - Definition of \"Contorlling shareholder\" - **[Rule 904 (4A)]** Power of SGX to designate interested Person - Definition of \"Transaction\" - (a) the provision or receipt of financial assistance; (b) the acquisition, disposal or leasing of assets; (c) the provision or receipt of goods or services; (d) the issuance or subscription of securities; (e) the granting of or being granted options; and (f) the establishment of joint ventures or joint investments - Rule 905, 906 and 907 - Rule 905(5) and 906(4) - Rule 907 - Power of SGX to aggregate transactions - Exceptions to Rule 915 - Exceptions to Rule 916 - Rule 920 - Code of Corporate Governance - The "Comply or Explain" Regime - Practical guidance - Rule 710 in relation to the 52 provisions - 13 principles are mandatory.